Financial Statements - MICROSOFT CORP (MSFT)

Year: 2023
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INCOME STATEMENTS

 

(In millions, except per share amounts)

 

 

 

 

 

 

 

Year Ended June 30,

2023

2022

2021

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

Product

 

$

64,699

$

72,732

$

71,074

Service and other

 

 

147,216

 

 

 

125,538

 

 

 

97,014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

211,915

 

198,270

 

168,088

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

17,804

19,064

18,219

Service and other

 

 

48,059

 

 

 

43,586

 

 

 

34,013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of revenue

65,863

62,650

52,232

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

146,052

135,620

115,856

Research and development

27,195

24,512

20,716

Sales and marketing

22,759

21,825

20,117

General and administrative

7,575

5,900

5,107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

88,523

83,383

69,916

Other income, net

788

333

1,186

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

89,311

83,716

71,102

Provision for income taxes

16,950

10,978

9,831

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

72,361

$

72,738

$

61,271

 

 

 

 

 

 

 

 

Earnings per share:

Basic

$

9.72

$

9.70

$

8.12

Diluted

$

9.68

$

9.65

$

8.05

 

 

 

 

Weighted average shares outstanding:

Basic

7,446

7,496

7,547

Diluted

7,472

7,540

7,608

 

 

 

Refer to accompanying notes.

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Item 8

 

COMPREHENSIVE INCOME STATEMENTS

(In millions)

 

 

 

 

 

Year Ended June 30,

2023

2022

2021

 

 

 

Net income

$

72,361

$

72,738

$

61,271

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Net change related to derivatives

 

(14

)

 

6

 

 

19

 

Net change related to investments

 

(1,444

)

 

(5,360

)

 

(2,266

)

Translation adjustments and other

 

(207

)

 

(1,146

)

 

873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss

(1,665

)

(6,500

)

(1,374

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

$

70,696

$

66,238

$

59,897

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

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BALANCE SHEETS

 

(In millions)

 

 

 

 

June 30,

2023

2022

 

 

Assets

Current assets:

Cash and cash equivalents

$

34,704

$

13,931

Short-term investments

76,558

90,826

 

 

 

 

 

 

 

 

 

 

Total cash, cash equivalents, and short-term investments

111,262

104,757

Accounts receivable, net of allowance for doubtful accounts of $650 and $633

48,688

44,261

Inventories

2,500

3,742

Other current assets

21,807

16,924

 

 

 

 

 

 

 

Total current assets

184,257

169,684

Property and equipment, net of accumulated depreciation of $68,251 and $59,660

 

95,641

74,398

Operating lease right-of-use assets

 

 

14,346

 

 

 

13,148

 

Equity investments

9,879

6,891

Goodwill

67,886

67,524

Intangible assets, net

9,366

11,298

Other long-term assets

30,601

21,897

 

 

 

 

 

 

 

Total assets

$

411,976

$

364,840

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$

18,095

$

19,000

Current portion of long-term debt

 

 

5,247

 

 

 

2,749

 

Accrued compensation

11,009

10,661

Short-term income taxes

4,152

 

4,067

Short-term unearned revenue

50,901

45,538

Other current liabilities

14,745

13,067

 

 

 

 

 

 

 

Total current liabilities

104,149

95,082

Long-term debt

41,990

47,032

Long-term income taxes

 

 

25,560

 

 

 

26,069

 

Long-term unearned revenue

2,912

2,870

Deferred income taxes

433

230

Operating lease liabilities

 

 

12,728

 

 

 

11,489

 

Other long-term liabilities

17,981

15,526

 

 

 

 

 

 

 

Total liabilities

205,753

198,298

 

 

 

 

 

 

 

Commitments and contingencies

Stockholders’ equity:

Common stock and paid-in capital – shares authorized 24,000; outstanding 7,432 and 7,464

93,718

86,939

Retained earnings

118,848

84,281

Accumulated other comprehensive loss

(6,343

)

(4,678

)

 

 

 

 

 

 

 

Total stockholders’ equity

206,223

166,542

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

$

411,976

$

364,840

 

 

 

Refer to accompanying notes.

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CASH FLOWS STATEMENTS

 

(In millions)

 

 

 

 

Year Ended June 30,

2023

2022

2021

 

 

 

Operations

Net income

$

72,361

 

$

72,738

 

$

61,271

 

Adjustments to reconcile net income to net cash from operations:

Depreciation, amortization, and other

13,861

14,460

11,686

Stock-based compensation expense

9,611

7,502

6,118

Net recognized losses (gains) on investments and derivatives

196

 

(409

)

(1,249

)

Deferred income taxes

(6,059

)

(5,702

)

(150

)

Changes in operating assets and liabilities:

Accounts receivable

(4,087

)

(6,834

)

(6,481

)

Inventories

1,242

 

 

(1,123

)

(737

)

Other current assets

(1,991

)

(709

)

(932

)

Other long-term assets

(2,833

)

(2,805

)

(3,459

)

Accounts payable

(2,721

)

2,943

 

2,798

 

Unearned revenue

 

 

5,535

 

 

 

5,109

 

 

 

4,633

 

Income taxes

 

 

(358

)

 

 

696

 

 

 

(2,309

)

Other current liabilities

2,272

 

 

2,344

 

4,149

 

Other long-term liabilities

553

825

1,402

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash from operations

87,582

89,035

76,740

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing

Cash premium on debt exchange

 

 

0

 

 

 

0

 

 

 

(1,754

)

Repayments of debt

(2,750

)

(9,023

)

(3,750

)

Common stock issued

1,866

1,841

1,693

Common stock repurchased

(22,245

)

(32,696

)

(27,385

)

Common stock cash dividends paid

(19,800

)

(18,135

)

(16,521

)

Other, net

(1,006

)

(863

)

(769

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in financing

(43,935

)

(58,876

)

(48,486

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing

Additions to property and equipment

(28,107

)

(23,886

)

(20,622

)

Acquisition of companies, net of cash acquired, and purchases of intangible and other assets

(1,670

)

(22,038

)

(8,909

)

Purchases of investments

(37,651

)

(26,456

)

(62,924

)

Maturities of investments

33,510

16,451

51,792

Sales of investments

14,354

28,443

14,008

Other, net

(3,116

)

(2,825

)

(922

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing

(22,680

)

(30,311

)

(27,577

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of foreign exchange rates on cash and cash equivalents

(194

)

(141

)

(29

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

20,773

 

(293

)

648

 

Cash and cash equivalents, beginning of period

13,931

14,224

13,576

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

$

34,704

$

13,931

$

14,224

 

 

 

 

Refer to accompanying notes.

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Item 8

 

STOCKHOLDERS’ EQUITY STATEMENTS

 

(In millions, except per share amounts)

 

 

 

 

Year Ended June 30,

2023

2022

2021

 

 

 

 

Common stock and paid-in capital

Balance, beginning of period

$

86,939

$

83,111

$

80,552

Common stock issued

1,866

1,841

1,963

Common stock repurchased

(4,696

)

(5,688

)

(5,539

)

Stock-based compensation expense

9,611

7,502

6,118

Other, net

(2

)

173

 

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

93,718

86,939

83,111

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

Balance, beginning of period

84,281

 

57,055

 

34,566

 

Net income

72,361

72,738

61,271

Common stock cash dividends

(20,226

)

(18,552

)

(16,871

)

Common stock repurchased

(17,568

)

(26,960

)

(21,879

)

Cumulative effect of accounting changes

 

 

0

 

 

0

 

 

(32

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

118,848

84,281

57,055

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss)

Balance, beginning of period

(4,678

)

1,822

3,186

 

Other comprehensive loss

(1,665

)

(6,500

)

(1,374

)

Cumulative effect of accounting changes

 

0

 

 

 

0

 

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

(6,343

)

(4,678

)

1,822

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

$

206,223

$

166,542

$

141,988

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

$

2.72

 

 

$

2.48

 

$

2.24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

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NOTES TO FINANCIAL STATEMENTS

NOTE 1 — ACCOUNTING POLICIES

Accounting Principles

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

We have recast certain prior period amounts to conform to the current period presentation. The recast of these prior period amounts had no impact on our consolidated balance sheets, consolidated income statements, or consolidated cash flows statements.

Principles of Consolidation

The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated.

Estimates and Assumptions

Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price (“SSP”) of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; product warranties; the fair value of and/or potential impairment of goodwill and intangible assets for our reporting units; product life cycles; useful lives of our tangible and intangible assets; allowances for doubtful accounts; the market value of, and demand for, our inventory; stock-based compensation forfeiture rates; when technological feasibility is achieved for our products; the potential outcome of uncertain tax positions that have been recognized in our consolidated financial statements or tax returns; and determining the timing and amount of impairments for investments. Actual results and outcomes may differ from management’s estimates and assumptions due to risks and uncertainties.

In July 2022, we completed an assessment of the useful lives of our server and network equipment. Due to investments in software that increased efficiencies in how we operate our server and network equipment, as well as advances in technology, we determined we should increase the estimated useful lives of both server and network equipment from four years to six years. This change in accounting estimate was effective beginning fiscal year 2023. Based on the carrying amount of server and network equipment included in property and equipment, net as of June 30, 2022, the effect of this change in estimate for fiscal year 2023 was an increase in operating income of $3.7 billion and net income of $3.0 billion, or $0.40 per both basic and diluted share.

Foreign Currencies

Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are recorded to other comprehensive income.

Revenue

Product Revenue and Service and Other Revenue

Product revenue includes sales from operating systems, cross-device productivity and collaboration applications, server applications, business solution applications, desktop and server management tools, software development tools, video games, and hardware such as PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories.

Service and other revenue includes sales from cloud-based solutions that provide customers with software, services, platforms, and content such as Office 365, Azure, Dynamics 365, and Xbox; solution support; and consulting services. Service and other revenue also includes sales from online advertising and LinkedIn.

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Revenue Recognition

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.

Nature of Products and Services

Licenses for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. Customers may purchase perpetual licenses or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. In cases where we allocate revenue to software updates, primarily because the updates are provided at no additional charge, revenue is recognized as the updates are provided, which is generally ratably over the estimated life of the related device or license.

Certain volume licensing programs, including Enterprise Agreements, include on-premises licenses combined with Software Assurance (“SA”). SA conveys rights to new software and upgrades released over the contract period and provides support, tools, and training to help customers deploy and use products more efficiently. On-premises licenses are considered distinct performance obligations when sold with SA. Revenue allocated to SA is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits, given that SA comprises distinct performance obligations that are satisfied over time.

Cloud services, which allow customers to use hosted software over the contract period without taking possession of the software, are provided on either a subscription or consumption basis. Revenue related to cloud services provided on a subscription basis is recognized ratably over the contract period. Revenue related to cloud services provided on a consumption basis, such as the amount of storage used in a period, is recognized based on the customer utilization of such resources. When cloud services require a significant level of integration and interdependency with software and the individual components are not considered distinct, all revenue is recognized over the period in which the cloud services are provided.

Revenue from search advertising is recognized when the advertisement appears in the search results or when the action necessary to earn the revenue has been completed. Revenue from consulting services is recognized as services are provided.

Our hardware is generally highly dependent on, and interrelated with, the underlying operating system and cannot function without the operating system. In these cases, the hardware and software license are accounted for as a single performance obligation and revenue is recognized at the point in time when ownership is transferred to resellers or directly to end customers through retail stores and online marketplaces.

Refer to Note 19 – Segment Information and Geographic Data for further information, including revenue by significant product and service offering.

Significant Judgments

Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. When a cloud-based service includes both on-premises software licenses and cloud services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Certain cloud services, primarily Office 365, depend on a significant level of integration, interdependency, and interrelation between the desktop applications and cloud services, and are accounted for together as one performance obligation. Revenue from Office 365 is recognized ratably over the period in which the cloud services are provided.

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Judgment is required to determine the SSP for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including on-premises licenses sold with SA or software updates provided at no additional charge. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services.

In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining the SSP.

Due to the various benefits from and the nature of our SA program, judgment is required to assess the pattern of delivery, including the exercise pattern of certain benefits across our portfolio of customers.

Our products are generally sold with a right of return, we may provide other credits or incentives, and in certain instances we estimate customer usage of our products and services, which are accounted for as variable consideration when determining the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period if additional information becomes available. Changes to our estimated variable consideration were not material for the periods presented.

Contract Balances and Other Receivables

Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record a receivable related to revenue recognized for multi-year on-premises licenses as we have an unconditional right to invoice and receive payment in the future related to those licenses.

Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include SA and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for consulting services to be performed in the future, LinkedIn subscriptions, Office 365 subscriptions, Xbox subscriptions, Windows post-delivery support, Dynamics business solutions, and other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service.

Refer to Note 13 – Unearned Revenue for further information, including unearned revenue by segment and changes in unearned revenue during the period.

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing. Examples include invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period, and multi-year on-premises licenses that are invoiced annually with revenue recognized upfront.

As of June 30, 2023 and 2022, long-term accounts receivable, net of allowance for doubtful accounts, was $4.5 billion and $3.8 billion, respectively, and is included in other long-term assets in our consolidated balance sheets.

The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence.

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Activity in the allowance for doubtful accounts was as follows:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

 

2023

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

Balance, beginning of period

$

710

 

$

798

 

$

816

Charged to costs and other

258

157

 

234

Write-offs

(252

)

(245

)

 

(252

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

$

716

 

$

710

 

$

798

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts included in our consolidated balance sheets:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

2023

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

Accounts receivable, net of allowance for doubtful accounts

$

650

 

$

633

 

$

751

Other long-term assets

66

 

 

77

 

 

47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

716

 

$

710

 

$

798

 

 

 

 

 

 

 

 

 

 

As of June 30, 2023 and 2022, other receivables related to activities to facilitate the purchase of server components were $9.2 billion and $6.1 billion, respectively, and are included in other current assets in our consolidated balance sheets.

We record financing receivables when we offer certain of our customers the option to acquire our software products and services offerings through a financing program in a limited number of countries. As of June 30, 2023 and 2022, our financing receivables, net were $5.3 billion and $4.1 billion, respectively, for short-term and long-term financing receivables, which are included in other current assets and other long-term assets in our consolidated balance sheets. We record an allowance to cover expected losses based on troubled accounts, historical experience, and other currently available evidence.

Assets Recognized from Costs to Obtain a Contract with a Customer

We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in other current and long-term assets in our consolidated balance sheets.

We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include our internal sales organization compensation program and certain partner sales incentive programs as we have determined annual compensation is commensurate with annual sales activities.

Cost of Revenue

Cost of revenue includes: manufacturing and distribution costs for products sold and programs licensed; operating costs related to product support service centers and product distribution centers; costs incurred to include software on PCs sold by original equipment manufacturers (“OEM”), to drive traffic to our websites, and to acquire online advertising space; costs incurred to support and maintain cloud-based and other online products and services, including datacenter costs and royalties; warranty costs; inventory valuation adjustments; costs associated with the delivery of consulting services; and the amortization of capitalized software development costs. Capitalized software development costs are amortized over the estimated lives of the products.

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Product Warranty

We provide for the estimated costs of fulfilling our obligations under hardware and software warranties at the time the related revenue is recognized. For hardware warranties, we estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific hardware warranty terms and conditions vary depending upon the product sold and the country in which we do business, but generally include parts and labor over a period generally ranging from 90 days to three years. For software warranties, we estimate the costs to provide bug fixes, such as security patches, over the estimated life of the software. We regularly reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.

Research and Development

Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs and the amortization of purchased software code and services content. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached, which for our software products, is generally shortly before the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized to cost of revenue over the estimated lives of the products.

Sales and Marketing

Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs. Advertising costs are expensed as incurred. Advertising expense was $904 million, $1.5 billion, and $1.5 billion in fiscal years 2023, 2022, and 2021, respectively.

Stock-Based Compensation

Compensation cost for stock awards, which include restricted stock units (“RSUs”) and performance stock units (“PSUs”), is measured at the fair value on the grant date and recognized as expense, net of estimated forfeitures, over the related service or performance period. The fair value of stock awards is based on the quoted price of our common stock on the grant date less the present value of expected dividends not received during the vesting period. We measure the fair value of PSUs using a Monte Carlo valuation model. Compensation cost for RSUs is recognized using the straight-line method and for PSUs is recognized using the accelerated method.

Compensation expense for the employee stock purchase plan (“ESPP”) is measured as the discount the employee is entitled to upon purchase and is recognized in the period of purchase.

Employee Severance

On January 18, 2023, we announced a decision to reduce our overall workforce by approximately 10,000 jobs through the third quarter of fiscal year 2023. During the three months ended December 31, 2022, we recorded $800 million of employee severance expenses related to these job eliminations as part of an ongoing employee benefit plan. These employee severance expenses were incurred as part of a corporate program, and were included in general and administrative expenses in our consolidated income statements and allocated to our segments based on relative gross margin. Refer to Note 19 – Segment Information and Geographic Data for further information.

Income Taxes

Income tax expense includes U.S. and international income taxes, and interest and penalties on uncertain tax positions. Certain income and expenses are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. Deferred tax assets are reported net of a valuation allowance when it is more likely than not that a tax benefit will not be realized. All deferred income taxes are classified as long-term in our consolidated balance sheets.

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PART II

Item 8

 

Financial Instruments

Investments

We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations.

Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive income. Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. To determine credit losses, we employ a systematic methodology that considers available quantitative and qualitative evidence. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, the investee. If we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in other income (expense), net and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, we may incur future impairments.

Equity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). We perform a qualitative assessment on a periodic basis and recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in other income (expense), net.

Derivatives

Derivative instruments are recognized as either assets or liabilities and measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.

For derivative instruments designated as fair value hedges, gains and losses are recognized in other income (expense), net with offsetting gains and losses on the hedged items. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net.

For derivative instruments designated as cash flow hedges, gains and losses are initially reported as a component of other comprehensive income and subsequently recognized in other income (expense), net with the corresponding hedged item. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net.

For derivative instruments that are not designated as hedges, gains and losses from changes in fair values are primarily recognized in other income (expense), net.

68


PART II

Item 8

 

Fair Value Measurements

We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

Level 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets. Our Level 1 investments include U.S. government securities, common and preferred stock, and mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges.
Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. Our Level 2 investments include commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Our Level 2 derivative assets and liabilities include certain cleared swap contracts and over-the-counter forward, option, and swap contracts.
Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 assets and liabilities include investments in corporate notes and bonds, municipal securities, and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities.

We measure equity investments without readily determinable fair values on a nonrecurring basis. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections.

Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.

Inventories

Inventories are stated at average cost, subject to the lower of cost or net realizable value. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Net realizable value is the estimated selling price less estimated costs of completion, disposal, and transportation. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation, and depreciated using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. The estimated useful lives of our property and equipment are generally as follows: computer software developed or acquired for internal use, three years; computer equipment, two to six years; buildings and improvements, five to 15 years; leasehold improvements, three to 20 years; and furniture and equipment, one to 10 years. Land is not depreciated.

Leases

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our consolidated balance sheets.

69


PART II

Item 8

 

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.

Goodwill

Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May 1) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.

Intangible Assets

Our intangible assets are subject to amortization and are amortized using the straight-line method over their estimated period of benefit, ranging from one to 20 years. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.

NOTE 2 — EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.

The components of basic and diluted EPS were as follows:

 

(In millions, except earnings per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

2023

2022

2021

 

 

 

 

 

 

 

 

 

 

 

 

Net income available for common shareholders (A)

$

72,361

$

72,738

$

61,271

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares of common stock (B)

7,446

7,496

7,547

Dilutive effect of stock-based awards

26

44

61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock and common stock equivalents (C)

7,472

7,540

7,608

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

Basic (A/B)

$

9.72

$

9.70

$

8.12

Diluted (A/C)

$

9.68

$

9.65

$

8.05

 

 

 

 

 

 

 

 

 

 

 

 

 

Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.

70


PART II

Item 8

 

NOTE 3 — OTHER INCOME (EXPENSE), NET

The components of other income (expense), net were as follows:

 

(In millions)

 

 

Year Ended June 30,

2023

2022

2021

 

 

 

Interest and dividends income

$

2,994

$

2,094

$

2,131

Interest expense

(1,968

)

(2,063

)

(2,346

)

Net recognized gains on investments

260

461

1,232

Net gains (losses) on derivatives

(456

)

(52

)

17

 

Net gains (losses) on foreign currency remeasurements

181

 

(75

)

54

 

Other, net

(223

)

(32

)

98

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

788

$

333

$

1,186

 

 

 

 

Net Recognized Gains (Losses) on Investments

Net recognized gains (losses) on debt investments were as follows:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

2023

2022

2021

 

 

 

Realized gains from sales of available-for-sale securities

$

36

 

$

162

 

$

105

 

Realized losses from sales of available-for-sale securities

(124

)

(138

)

(40

)

Impairments and allowance for credit losses

(10

)

(81

)

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

(98

)

$

(57

)

$

63

 

 

 

 

 

 

 

 

 

 

 

 

 

Net recognized gains (losses) on equity investments were as follows:

 

(In millions)

 

 

 

 

 

Year Ended June 30,

2023

2022

2021

 

 

 

Net realized gains on investments sold

$

75

 

$

29

 

$

123

 

Net unrealized gains on investments still held

303

 

509

 

1,057

 

Impairments of investments

(20

)

(20

)

(11

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

358

$

518

$

1,169

 

 

 

 

 

 

 

 

 

 

 

 

 

71


PART II

Item 8

 

NOTE 4 — INVESTMENTS

Investment Components

The components of investments were as follows:

 

(In millions)

 

Fair Value

Level

 

 

Adjusted

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Recorded

Basis

 

 

Cash

and Cash

Equivalents

 

Short-term

Investments

 

 

Equity

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

Level 2

 

$

16,589

$

0

$

0

$

16,589

$

12,231

$

4,358

$

0

Certificates of deposit

 

 

Level 2

 

 

2,701

0

0

2,701

2,657

44

0

U.S. government securities

 

 

Level 1

 

65,237

 

 

 

2

 

 

 

(3,870

)

 

 

61,369

 

 

 

2,991

 

 

 

58,378

 

 

 

0

U.S. agency securities

 

 

Level 2

 

 

 

2,703

 

 

 

0

 

 

 

0

 

 

 

2,703

 

 

 

894

 

 

 

1,809

 

 

 

0

 

Foreign government bonds

 

 

Level 2

 

498

 

 

 

1

 

 

 

(24

)

 

 

475

 

 

 

0

 

 

 

475

 

 

 

0

Mortgage- and asset-backed securities

 

 

Level 2

 

824

 

 

 

1

 

 

 

(39

)

 

 

786

 

 

 

0

 

 

 

786

 

 

 

0

Corporate notes and bonds

 

 

Level 2

 

10,809

 

 

 

8

 

 

 

(583

)

 

 

10,234

 

 

 

0

 

 

 

10,234

 

 

 

0

Corporate notes and bonds

 

 

Level 3

 

 

 

120

 

 

 

0

 

 

 

0

 

 

 

120

 

 

 

0

 

 

 

120

 

 

 

0

 

Municipal securities

 

 

Level 2

 

285

 

 

 

1

 

 

 

(18

)

 

 

268

 

 

 

7

 

 

 

261

 

 

 

0

 

Municipal securities

 

 

Level 3

 

103

 

 

 

0

 

 

 

(16

)

 

 

87

 

 

 

0

 

 

 

87

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt investments

 

 

 

 

 

$

99,869

 

 

$

13

 

 

$

(4,550

)

 

$

95,332

 

 

$

18,780

 

 

$

76,552

 

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investments

 

 

Level 1

 

 

 

 

 

 

 

 

 

 

 

 

$

10,138

 

 

$

7,446

 

 

$

0

 

 

$

2,692

Equity investments

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

7,187

 

 

 

0

 

 

 

0

 

 

 

7,187

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

17,325

 

 

$

7,446

 

 

$

0

 

 

$

9,879

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

8,478

 

 

$

8,478

 

 

$

0

 

 

$

0

 

Derivatives, net (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

0

 

 

 

6

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

121,141

 

 

$

34,704

 

 

$

76,558

 

 

$

9,879

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

72


PART II

Item 8

 

(In millions)

 

Fair Value

Level

 

 

Adjusted

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Recorded

Basis

 

 

Cash

and Cash

Equivalents

 

Short-term

Investments

 

 

Equity

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

Level 2

 

$

2,500

$

0

$

0

$

2,500

$

2,498

$

2

$

0

Certificates of deposit

 

 

Level 2

 

 

2,071

0

0

2,071

2,032

39

0

U.S. government securities

 

 

Level 1

 

79,696

29

(2,178

)

77,547

9

77,538

0

U.S. agency securities

 

 

Level 2

 

 

 

419

 

 

 

0

 

 

(9

)

 

 

410

 

 

 

0

 

 

 

410

 

 

 

0

 

Foreign government bonds

 

 

Level 2

 

506

0

(24

)

482

0

482

0

Mortgage- and asset-backed securities

 

 

Level 2

 

727

1

(30

)

698

0

698

0

Corporate notes and bonds

 

 

Level 2

 

11,661

4

(554

)

11,111

0

11,111

0

Corporate notes and bonds

 

 

Level 3

 

 

 

67

 

 

 

0

 

 

0

 

 

 

67

 

 

 

0

 

 

 

67

 

 

 

0

 

Municipal securities

 

 

Level 2

 

368

19

(13

)

374

0

374

0

 

Municipal securities

 

 

Level 3

 

103

0

(6

)

97

0

97

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt investments

 

 

 

 

 

$

98,118

 

 

$

53

 

$

(2,814

)

$

95,357

 

 

$

4,539

 

 

$

90,818

 

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investments

 

 

Level 1

 

 

 

 

 

$

1,590

$

1,134

$

0

$

456

Equity investments

 

 

Other

 

 

 

 

6,435

0

0

 

6,435

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

8,025

 

 

$

1,134

 

 

$

0

 

 

$

6,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

8,258

 

 

$

8,258

 

 

$

0

 

 

$

0

 

Derivatives, net (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

 

 

0

 

 

 

8

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

$

111,648

$

13,931

$

90,826

$

6,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)
Refer to Note 5 – Derivatives for further information on the fair value of our derivative instruments.

 

Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy. As of June 30, 2023 and 2022, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $4.2 billion and $3.8 billion, respectively.

73


PART II

Item 8

 

Unrealized Losses on Debt Investments

Debt investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows:

 

Less than 12 Months

12 Months or Greater

Total
Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

Fair Value

Unrealized
Losses

Fair Value

Unrealized
Losses

Total
Fair Value

 

 

 

 

 

 

 

 

June 30, 2023

 

 

 

 

 

 

U.S. government and agency securities

 

$

7,950

 

 

$

(336

)

 

$

45,273

 

 

$

(3,534

)

 

$

53,223

 

 

$

(3,870

)

Foreign government bonds

 

 

77

 

 

 

(5

)

 

 

391

 

 

 

(19

)

 

 

468

 

 

 

(24

)

Mortgage- and asset-backed securities

 

 

257

 

 

 

(5

)

 

 

412

 

 

 

(34

)

 

 

669

 

 

 

(39

)

Corporate notes and bonds

 

 

2,326

 

 

 

(49

)

 

 

7,336

 

 

 

(534

)

 

 

9,662

 

 

 

(583

)

Municipal securities

 

 

111

 

 

 

(3

)

 

 

186

 

 

 

(31

)

 

 

297

 

 

 

(34

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

10,721

 

 

$

(398

)

 

$

53,598

 

 

$

(4,152

)

 

$

64,319

 

 

$

(4,550

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Greater

 

 

 

 

 

 

 

Total
Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

Fair Value

 

 

 

Unrealized
Losses

 

 

 

Fair Value

 

 

 

Unrealized
Losses

 

 

 

Total
Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

$

59,092

$

(1,835

)

$

2,210

$

(352

)

 

$

61,302

$

(2,187

)

Foreign government bonds

418

(18

)

27

(6

)

 

445

(24

)

Mortgage- and asset-backed securities

510

(26

)

41

(4

)

 

551

(30

)

Corporate notes and bonds

9,443

(477

)

786

(77

)

 

10,229

(554

)

Municipal securities

 

 

178

 

 

 

(12

)

 

 

74

 

 

 

(7

)

 

 

252

 

 

 

(19

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

69,641

$

(2,368

)

$

3,138

$

(446

)

 

$

72,779

$

(2,814

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent impairments based on our evaluation of available evidence.

Debt Investment Maturities

 

(In millions)

Adjusted

Cost Basis

Estimated

Fair Value

 

 

 

 

June 30, 2023

 

 

Due in one year or less

$

38,182

$

38,048

Due after one year through five years

47,127

44,490

Due after five years through 10 years

13,262

11,628

Due after 10 years

1,298

1,166

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

99,869

$

95,332

 

 

 

74


PART II

Item 8

 

NOTE 5 — DERIVATIVES

We use derivative instruments to manage risks related to foreign currencies, interest rates, equity prices, and credit; to enhance investment returns; and to facilitate portfolio diversification. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible. Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment.

Foreign Currencies

Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions.

Foreign currency risks related to certain non-U.S. dollar-denominated investments are hedged using foreign exchange forward contracts that are designated as fair value hedging instruments. Foreign currency risks related to certain Euro-denominated debt are hedged using foreign exchange forward contracts that are designated as cash flow hedging instruments.

Certain options and forwards not designated as hedging instruments are also used to manage the variability in foreign exchange rates on certain balance sheet amounts and to manage other foreign currency exposures.

Interest Rate

Interest rate risks related to certain fixed-rate debt are hedged using interest rate swaps that are designated as fair value hedging instruments to effectively convert the fixed interest rates to floating interest rates.

Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of our fixed-income portfolio to achieve economic returns that correlate to certain broad-based fixed-income indices using option, futures, and swap contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.

Equity

Securities held in our equity investments portfolio are subject to market price risk. At times, we may hold options, futures, and swap contracts. These contracts are not designated as hedging instruments.

Credit

Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap contracts to manage credit exposures relative to broad-based indices and to facilitate portfolio diversification. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.

Credit-Risk-Related Contingent Features

Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of June 30, 2023, our long-term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no collateral was required to be posted.

75


PART II

Item 8

 

The following table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar equivalents:

 

(In millions)

June 30,

2023

June 30,

2022

 

 

 

 

 

 

 

 

 

 

 

 

Designated as Hedging Instruments

 

 

Foreign exchange contracts purchased

 

$

1,492

 

 

$

635

 

Interest rate contracts purchased

 

 

1,078

 

 

 

1,139

 

 

 

Not Designated as Hedging Instruments

 

 

Foreign exchange contracts purchased

 

 

7,874

 

 

 

10,322

 

Foreign exchange contracts sold

 

 

25,159

 

 

 

21,606

 

Equity contracts purchased

 

 

3,867

 

 

 

1,131

 

Equity contracts sold

 

 

2,154

 

 

 

0

 

Other contracts purchased

1,224

 

1,642

Other contracts sold

581

 

544

 

 

 

 

 

 

 

 

 

Fair Values of Derivative Instruments

The following table presents our derivative instruments:

 

 (In millions)

Derivative

Assets

Derivative

Liabilities

Derivative

Assets

Derivative

Liabilities

June 30,

2023

June 30,

2022

Designated as Hedging Instruments

Foreign exchange contracts

$

34

$

(67

)

$

0

$

(77

)

Interest rate contracts

16

0

3

0

Not Designated as Hedging Instruments

Foreign exchange contracts

249

(332

)

333

(362

)

Equity contracts

 

 

165

 

 

 

(400

)

 

 

5

 

 

 

(95

)

Other contracts

5

(6

)

15

(17

)

Gross amounts of derivatives

469

(805

)

356

(551

)

Gross amounts of derivatives offset in the balance sheet

(202

)

206

(130

)

133

Cash collateral received

0

(125

)

0

(75

)

Net amounts of derivatives

$

267

$

(724

)

$

226

$

(493

)

Reported as

Short-term investments

$

6

$

0

$

8

$

0

Other current assets

245

0

218

0

Other long-term assets

16

0

0

0

Other current liabilities

0

(341

)

0

(298

)

Other long-term liabilities

0

(383

)

0

(195

)

Total

$

267

$

(724

)

$

226

$

(493

)

 

Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $442 million and $804 million, respectively, as of June 30, 2023, and $343 million and $550 million, respectively, as of June 30, 2022.

The following table presents the fair value of our derivatives instruments on a gross basis:

 

(In millions)

 

Level 1

 

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

$

0

 

 

$

462

 

 

$

7

 

 

$

469

 

Derivative liabilities

 

 

0

 

 

 

(805

)

 

 

0

 

 

 

(805

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

 

1

 

 

 

349

 

 

 

6

 

 

 

356

 

Derivative liabilities

 

 

0

 

 

 

(551

)

 

 

0

 

 

 

(551

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

76


PART II

Item 8

 

 

Gains (losses) on derivative instruments recognized in other income (expense), net were as follows:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

2023

2022

2021

Designated as Fair Value Hedging Instruments

Foreign exchange contracts

Derivatives

$

0

 

$

49

 

$

193

 

Hedged items

 

0

 

 

(50

)

 

(188

)

Excluded from effectiveness assessment

 

0

 

 

4

 

 

30

 

Interest rate contracts

Derivatives

 

(65

)

 

(92

)

 

(37

)

Hedged items

 

38

 

 

108

 

 

53

 

 

 

 

 

 

 

 

 

 

Designated as Cash Flow Hedging Instruments

Foreign exchange contracts

Amount reclassified from accumulated other comprehensive income

 

61

 

 

(79

)

 

17

 

 

 

 

 

 

 

 

 

 

Not Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

(73

)

 

383

 

 

27

 

Equity contracts

 

 

(420

)

 

 

13

 

 

 

(6

)

Other contracts

 

(41

)

 

(85

)

 

15

 

 

 

 

 

 

 

 

 

 

 

Gains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were as follows:

 

(In millions)

 

 

 

 

 

Year Ended June 30,

2023

2022

2021

 

 

 

Designated as Cash Flow Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

 

 

Included in effectiveness assessment

$

34

 

$

(57

)

$

34

 

 

 

 

 

NOTE 6 INVENTORIES

The components of inventories were as follows:

 

(In millions)

 

 

 

 

June 30,

2023

2022

 

 

Raw materials

$

709

$

1,144

Work in process

23

82

Finished goods

1,768

2,516

 

 

 

 

 

 

 

Total

$

2,500

$

3,742

 

 

 

77


PART II

Item 8

 

NOTE 7 — PROPERTY AND EQUIPMENT

The components of property and equipment were as follows:

 

(In millions)

 

 

 

 

June 30,

2023

2022

 

 

Land

$

5,683

$

4,734

Buildings and improvements

68,465

55,014

Leasehold improvements

8,537

7,819

Computer equipment and software

74,961

60,631

Furniture and equipment

6,246

5,860

 

 

 

 

 

 

 

 

Total, at cost

163,892

134,058

Accumulated depreciation

(68,251

)

(59,660

)

 

 

 

 

 

 

 

 

Total, net

$

95,641

$

74,398

 

 

 

During fiscal years 2023, 2022, and 2021, depreciation expense was $11.0 billion, $12.6 billion, and $9.3 billion, respectively. Depreciation expense declined in fiscal year 2023 due to the change in estimated useful lives of our server and network equipment.

As of June 30, 2023, we have committed $13.5 billion for the construction of new buildings, building improvements, and leasehold improvements, primarily related to datacenters.

NOTE 8 — BUSINESS COMBINATIONS

Nuance Communications, Inc.

On March 4, 2022, we completed our acquisition of Nuance Communications, Inc. (“Nuance”) for a total purchase price of $18.8 billion, consisting primarily of cash. Nuance is a cloud and artificial intelligence (“AI”) software provider with healthcare and enterprise AI experience, and the acquisition will build on our industry-specific cloud offerings. The financial results of Nuance have been included in our consolidated financial statements since the date of the acquisition. Nuance is reported as part of our Intelligent Cloud segment.

The allocation of the purchase price to goodwill was completed as of December 31, 2022. The major classes of assets and liabilities to which we have allocated the purchase price were as follows:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill (a)

 

 

$

16,326

 

Intangible assets

 

 

 

4,365

 

Other assets

 

 

 

42

 

Other liabilities (b)

 

 

 

(1,972

)

 

 

 

 

 

 

 

 

Total

 

 

$

18,761

 

 

 

 

(a)
Goodwill was assigned to our Intelligent Cloud segment and was primarily attributed to increased synergies that are expected to be achieved from the integration of Nuance. None of the goodwill is expected to be deductible for income tax purposes.
(b)
Includes $986 million of convertible senior notes issued by Nuance in 2015 and 2017, substantially all of which have been redeemed.

Following are the details of the purchase price allocated to the intangible assets acquired:

 

(In millions, except average life)

 

Amount

 

 

Weighted

Average Life

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer-related

 

$

2,610

 

9 years

 

Technology-based

 

 

1,540

 

5 years

 

Marketing-related

 

 

215

 

 

4 years

 

 

 

 

 

 

 

 

 

 

Total

 

$

4,365

 

7 years

 

 

 

78


PART II

Item 8

 

ZeniMax Media Inc.

On March 9, 2021, we completed our acquisition of ZeniMax Media Inc. (“ZeniMax”), the parent company of Bethesda Softworks LLC (“Bethesda”), for a total purchase price of $8.1 billion, consisting primarily of cash. The purchase price included $766 million of cash and cash equivalents acquired. Bethesda is one of the largest, privately held game developers and publishers in the world, and brings a broad portfolio of games, technology, and talent to Xbox. The financial results of ZeniMax have been included in our consolidated financial statements since the date of the acquisition. ZeniMax is reported as part of our More Personal Computing segment.

The allocation of the purchase price to goodwill was completed as of December 31, 2021. The major classes of assets and liabilities to which we have allocated the purchase price were as follows:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

766

Goodwill

5,510

Intangible assets

 

 

 

1,968

 

Other assets

 

 

 

121

 

Other liabilities

(244

)

 

 

 

 

 

 

 

Total

$

8,121

 

 

 

Goodwill was assigned to our More Personal Computing segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of ZeniMax. None of the goodwill is expected to be deductible for income tax purposes.

Following are details of the purchase price allocated to the intangible assets acquired:

 

(In millions, except average life)

 

Amount

 

 

Weighted

Average Life

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology-based

 

$

1,341

 

4 years

 

Marketing-related

 

 

627

 

11 years

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,968

 

6 years

 

 

 

Activision Blizzard, Inc.

On January 18, 2022, we entered into a definitive agreement to acquire Activision Blizzard, Inc. (“Activision Blizzard”) for $95.00 per share in an all-cash transaction valued at $68.7 billion, inclusive of Activision Blizzard’s net cash. Activision Blizzard is a leader in game development and an interactive entertainment content publisher. The acquisition will accelerate the growth in our gaming business across mobile, PC, console, and cloud gaming. The acquisition has been approved by Activision Blizzard’s shareholders. We continue to work toward closing the transaction subject to obtaining required regulatory approvals and satisfaction of other customary closing conditions. Microsoft and Activision Blizzard have jointly agreed to extend the merger agreement through October 18, 2023 to allow for additional time to resolve remaining regulatory concerns.

NOTE 9 — GOODWILL

Changes in the carrying amount of goodwill were as follows:

 

(In millions)

 

June 30,

2021

 

Acquisitions

 

Other

 

June 30,

2022

 

 

 

Acquisitions

 

 

 

Other

 

June 30,
2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

$

24,317

$

599

$

(105

)

$

24,811

$

11

 

 

$

(47

)

$

24,775

Intelligent Cloud

13,256

16,879

47

 

30,182

223

 

 

64

 

30,469

More Personal Computing

12,138

648

(255

)

12,531

0

 

111

 

12,642

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

49,711

 

$

18,126

$

(313

)

$

67,524

 

 

$

234

 

$

128

 

$

67,886

 

 

 

 

 

 

 

 

 

 

 

 

79


PART II

Item 8

 

The measurement periods for the valuation of assets acquired and liabilities assumed end as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but do not exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.

Any change in the goodwill amounts resulting from foreign currency translations and purchase accounting adjustments are presented as “Other” in the table above. Also included in “Other” are business dispositions and transfers between segments due to reorganizations, as applicable.

Goodwill Impairment

We test goodwill for impairment annually on May 1 at the reporting unit level, primarily using a discounted cash flow methodology with a peer-based, risk-adjusted weighted average cost of capital. We believe use of a discounted cash flow approach is the most reliable indicator of the fair values of the businesses.

No instances of impairment were identified in our May 1, 2023, May 1, 2022, or May 1, 2021 tests. As of June 30, 2023 and 2022, accumulated goodwill impairment was $11.3 billion.

NOTE 10 INTANGIBLE ASSETS

The components of intangible assets, all of which are finite-lived, were as follows:

 

(In millions)

Gross
Carrying
Amount

Accumulated
Amortization

Net Carrying
Amount

Gross
Carrying
Amount

 

Accumulated
Amortization

Net Carrying
Amount

 

 

 

 

 

 

 

 

June 30,

2023

2022

 

 

 

 

 

 

Technology-based

$

11,245

$

(7,589

)

$

3,656

$

11,277

$

(6,958

)

$

4,319

Customer-related

7,281

(4,047

)

3,234

7,342

(3,171

)

4,171

Marketing-related

4,935

(2,473

)

2,462

4,942

(2,143

)

2,799

Contract-based

29

(15

)

14

16

(7

)

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

23,490

 

$

(14,124

)

$

9,366

$

23,577

 

$

(12,279

)

$

11,298

 

 

 

 

 

 

 

 

 

No material impairments of intangible assets were identified during fiscal years 2023, 2022, or 2021. We estimate that we have no significant residual value related to our intangible assets.

The components of intangible assets acquired during the periods presented were as follows:

 

(In millions)

Amount

Weighted

Average Life

Amount

Weighted

Average Life

 

 

 

 

 

 

Year Ended June 30,

2023

2022

 

 

 

 

Technology-based

$

522

7 years

$

2,611

4 years

Customer-related

 

0

0 years

 

2,837

9 years

 

Marketing-related

7

5 years

233

4 years

Contract-based

 

 

12

 

 

 

3 years

 

 

 

0

 

 

 

0 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

541

6 years

$

5,681

7 years

 

 

 

Intangible assets amortization expense was $2.5 billion, $2.0 billion, and $1.6 billion for fiscal years 2023, 2022, and 2021, respectively.

80


PART II

Item 8

 

The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2023:

 

(In millions)

 

 

 

Year Ending June 30,

 

2024

$

2,363

2025

1,881

2026

1,381

2027

929

2028

652

Thereafter

2,160

 

 

 

 

 

Total

$

9,366

 

 

NOTE 11 — DEBT

The components of debt were as follows:

 

(In millions, issuance by calendar year)

Maturities

(calendar year)

Stated Interest

Rate

 

Effective Interest

Rate

 

June 30,

2023

June 30,

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009 issuance of $3.8 billion

 

 

 

2039

 

 

5.20%

 

 

 

5.24%

 

 

$

520

$

520

2010 issuance of $4.8 billion

 

 

2040

 

 

4.50%

 

 

 

4.57%

 

 

486

486

2011 issuance of $2.3 billion

 

 

2041

 

 

5.30%

 

 

 

5.36%

 

 

718

718

2012 issuance of $2.3 billion

 

 

 

 

2042

 

 

 

 

3.50%

 

 

 

 

3.57%

 

 

 

454

 

 

 

1,204

 

2013 issuance of $5.2 billion

2023

2043

3.63%

4.88%

 

3.73%

4.92%

 

 

1,814

2,814

2013 issuance of €4.1 billion

 

 

2028

2033

 

 

2.63%

3.13%

 

 

2.69%

3.22%

 

 

 

2,509

 

 

 

2,404

 

2015 issuance of $23.8 billion

2025

2055

2.70%

4.75%

 

2.77%

4.78%

 

 

9,805

10,805

2016 issuance of $19.8 billion

2023

2056

2.00%

3.95%

 

2.10%

4.03%

 

 

9,430

9,430

2017 issuance of $17.0 billion

2024

2057

2.88%

4.50%

 

3.04%

4.53%

 

 

8,945

8,945

2020 issuance of $10.0 billion

2050

2060

2.53%

2.68%

 

2.53%

2.68%

 

 

10,000

10,000

2021 issuance of $8.2 billion

 

 

2052

2062

 

 

2.92%

3.04%

 

 

2.92%

3.04%

 

 

 

8,185

 

 

 

8,185

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total face value

 

 

 

 

 

 

52,866

55,511

Unamortized discount and issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

(438

)

 

 

(471

)

Hedge fair value adjustments (a)

 

 

 

 

 

 

 

 

 

 

 

 

(106

)

 

 

(68

)

Premium on debt exchange

 

 

 

 

 

 

 

 

 

 

 

 

(5,085

)

 

 

(5,191

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt

 

 

 

 

 

 

 

 

 

47,237

49,781

Current portion of long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

(5,247

)

 

 

(2,749

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

 

 

 

 

 

 

 

 

 

$

41,990

 

 

$

47,032

 

 

 

 

 

 

 

 

(a)
Refer to Note 5 – Derivatives for further information on the interest rate swaps related to fixed-rate debt.

As of June 30, 2023 and 2022, the estimated fair value of long-term debt, including the current portion, was $46.2 billion and $50.9 billion, respectively. The estimated fair values are based on Level 2 inputs.

Debt in the table above is comprised of senior unsecured obligations and ranks equally with our other outstanding obligations. Interest is paid semi-annually, except for the Euro-denominated debt, which is paid annually. Cash paid for interest on our debt for fiscal years 2023, 2022, and 2021 was $1.7 billion, $1.9 billion, and $2.0 billion, respectively.

81


PART II

Item 8

 

The following table outlines maturities of our long-term debt, including the current portion, as of June 30, 2023:

 

(In millions)

 

 

Year Ending June 30,

2024

$

5,250

2025

2,250

2026

3,000

2027

8,000

2028

0

Thereafter

34,366

Total

$

52,866

 

NOTE 12 — INCOME TAXES

Provision for Income Taxes

The components of the provision for income taxes were as follows:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

2023

2022

2021

 

 

 

Current Taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. federal

$

14,009

 

$

8,329

 

$

3,285

 

U.S. state and local

 

 

2,322

 

 

 

1,679

 

 

 

1,229

 

Foreign

 

6,678

 

 

6,672

 

 

5,467

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current taxes

$

23,009

 

 

$

16,680

 

 

$

9,981

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred Taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. federal

$

(6,146

)

 

$

(4,815

)

 

$

25

 

U.S. state and local

 

 

(477

)

 

 

(1,062

)

 

 

(204

)

Foreign

 

564

 

 

 

175

 

 

 

29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred taxes

$

(6,059

)

 

$

(5,702

)

 

$

(150

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

$

16,950

 

$

10,978

 

$

9,831

 

 

 

 

 

 

 

 

 

 

 

 

 

 

82


PART II

Item 8

 

U.S. and foreign components of income before income taxes were as follows:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

2023

2022

2021

 

 

 

U.S.

$

52,917

 

$

47,837

 

$

34,972

 

Foreign

36,394

35,879

36,130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

$

89,311

$

83,716

$

71,102

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective Tax Rate

The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

2023

2022

2021

 

 

 

Federal statutory rate

21.0%

 

21.0%

 

21.0%

 

Effect of:

 

 

 

Foreign earnings taxed at lower rates

(1.8)%

 

(1.3)%

 

(2.7)%

 

Impact of intangible property transfers

 

 

0%

 

 

 

(3.9)%

 

 

 

0%

 

Foreign-derived intangible income deduction

 

 

(1.3)%

 

 

 

(1.1)%

 

 

 

(1.3)%

 

State income taxes, net of federal benefit

 

 

1.6%

 

 

 

1.4%

 

 

 

1.4%

 

Research and development credit

 

 

(1.1)%

 

 

 

(0.9)%

 

 

 

(0.9)%

 

Excess tax benefits relating to stock-based compensation

 

 

(0.7)%

 

 

 

(1.9)%

 

 

 

(2.4)%

 

Interest, net

 

 

0.8%

 

 

 

0.5%

 

 

 

0.5%

 

Other reconciling items, net

0.5%

 

(0.7)%

 

(1.8)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective rate

19.0%

 

13.1%

 

13.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In the first quarter of fiscal year 2022, we transferred certain intangible properties from our Puerto Rico subsidiary to the U.S. The transfer of intangible properties resulted in a $3.3 billion net income tax benefit in the first quarter of fiscal year 2022, as the value of future U.S. tax deductions exceeded the current tax liability from the U.S. global intangible low-taxed income (“GILTI”) tax.

 

We have historically paid India withholding taxes on software sales through distributor withholding and tax audit assessments in India. In March 2021, the India Supreme Court ruled favorably in the case of Engineering Analysis Centre of Excellence Private Limited vs The Commissioner of Income Tax for companies in 86 separate appeals, some dating back to 2012, holding that software sales are not subject to India withholding taxes. Although we were not a party to the appeals, our software sales in India were determined to be not subject to withholding taxes. Therefore, we recorded a net income tax benefit of $620 million in the third quarter of fiscal year 2021 to reflect the results of the India Supreme Court decision impacting fiscal year 1996 through fiscal year 2016.

 

The decrease from the federal statutory rate in fiscal year 2023 is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations center in Ireland. The decrease from the federal statutory rate in fiscal year 2022 is primarily due to the net income tax benefit related to the transfer of intangible properties, earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations center in Ireland, and tax benefits relating to stock-based compensation. The decrease from the federal statutory rate in fiscal year 2021 is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland and Puerto Rico, tax benefits relating to stock-based compensation, and tax benefits from the India Supreme Court decision on withholding taxes. In fiscal year 2023, our foreign regional operating center in Ireland, which is taxed at a rate lower than the U.S. rate, generated 81% of our foreign income before tax. In fiscal years 2022 and 2021, our foreign regional operating centers in Ireland and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 71% and 82% of our foreign income before tax. Other reconciling items, net consists primarily of tax credits and GILTI tax, and in fiscal year 2021, includes tax benefits from the India Supreme Court decision on withholding taxes. In fiscal years 2023, 2022, and 2021, there were no individually significant other reconciling items.

83


PART II

Item 8

 

The increase in our effective tax rate for fiscal year 2023 compared to fiscal year 2022 was primarily due to a $3.3 billion net income tax benefit in the first quarter of fiscal year 2022 related to the transfer of intangible properties and a decrease in tax benefits relating to stock-based compensation. The decrease in our effective tax rate for fiscal year 2022 compared to fiscal year 2021 was primarily due to a $3.3 billion net income tax benefit in the first quarter of fiscal year 2022 related to the transfer of intangible properties, offset in part by changes in the mix of our income before income taxes between the U.S. and foreign countries, as well as tax benefits in the prior year from the India Supreme Court decision on withholding taxes, an agreement between the U.S. and India tax authorities related to transfer pricing, and final Tax Cuts and Jobs Act (“TCJA”) regulations.

The components of the deferred income tax assets and liabilities were as follows:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

2023

2022

 

 

Deferred Income Tax Assets

 

 

Stock-based compensation expense

$

681

$

601

Accruals, reserves, and other expenses

3,131

2,874

Loss and credit carryforwards

1,441

1,546

Amortization (a)

 

 

9,440

 

 

 

10,183

 

Leasing liabilities

 

 

5,041

 

 

 

4,557

 

Unearned revenue

 

 

3,296

 

 

 

2,876

 

Book/tax basis differences in investments and debt

 

 

373

 

 

 

0

 

Capitalized research and development (a)

 

 

6,958

 

 

 

473

 

Other

489

461

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred income tax assets

 

30,850

 

23,571

Less valuation allowance

(939

)

(1,012

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred income tax assets, net of valuation allowance

$

29,911

$

22,559

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred Income Tax Liabilities

 

 

Book/tax basis differences in investments and debt

$

0

 

$

(174

)

Leasing assets

 

 

(4,680

)

 

 

(4,291

)

Depreciation

 

 

(2,674

)

 

 

(1,602

)

Deferred tax on foreign earnings

 

 

(2,738

)

 

 

(3,104

)

Other

(89

)

(103

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred income tax liabilities

$

(10,181

)

$

(9,274

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net deferred income tax assets

$

19,730

 

$

13,285

 

 

 

 

 

 

 

 

 

 

 

Reported As

 

 

Other long-term assets

 

$

20,163

 

 

$

13,515

 

Long-term deferred income tax liabilities

(433

)

(230

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net deferred income tax assets

$

19,730

 

$

13,285

 

 

 

 

 

 

 

 

 

 

(a)
Provisions enacted in the TCJA related to the capitalization for tax purposes of research and development expenditures became effective on July 1, 2022. These provisions require us to capitalize research and development expenditures and amortize them on our U.S. tax return over five or fifteen years, depending on where research is conducted.

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are paid or recovered.

As of June 30, 2023, we had federal, state, and foreign net operating loss carryforwards of $509 million, $1.2 billion, and $2.3 billion, respectively. The federal and state net operating loss carryforwards have varying expiration dates ranging from fiscal year 2024 to 2043 or indefinite carryforward periods, if not utilized. The majority of our foreign net operating loss carryforwards do not expire. Certain acquired net operating loss carryforwards are subject to an annual limitation but are expected to be realized with the exception of those which have a valuation allowance. As of June 30, 2023, we had $456 million federal capital loss carryforwards for U.S. tax purposes from our acquisition of Nuance. The federal capital loss carryforwards are subject to an annual limitation and will expire in fiscal year 2025.

84


PART II

Item 8

 

The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards, federal capital loss carryforwards, and other net deferred tax assets that may not be realized.

Income taxes paid, net of refunds, were $23.1 billion, $16.0 billion, and $13.4 billion in fiscal years 2023, 2022, and 2021, respectively.

Uncertain Tax Positions

Gross unrecognized tax benefits related to uncertain tax positions as of June 30, 2023, 2022, and 2021, were $17.1 billion, $15.6 billion, and $14.6 billion, respectively, which were primarily included in long-term income taxes in our consolidated balance sheets. If recognized, the resulting tax benefit would affect our effective tax rates for fiscal years 2023, 2022, and 2021 by $14.4 billion, $13.3 billion, and $12.5 billion, respectively.

As of June 30, 2023, 2022, and 2021, we had accrued interest expense related to uncertain tax positions of $5.2 billion, $4.3 billion, and $4.3 billion, respectively, net of income tax benefits. The provision for income taxes for fiscal years 2023, 2022, and 2021 included interest expense related to uncertain tax positions of $918 million, $36 million, and $274 million, respectively, net of income tax benefits.

The aggregate changes in the gross unrecognized tax benefits related to uncertain tax positions were as follows:

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

2023

2022

2021

 

 

 

Beginning unrecognized tax benefits

$

15,593

$

14,550

$

13,792

Decreases related to settlements

(329

)

(317

)

(195

)

Increases for tax positions related to the current year

1,051

1,145

790

Increases for tax positions related to prior years

870

461

461

Decreases for tax positions related to prior years

(60

)

(246

)

(297

)

Decreases due to lapsed statutes of limitations

(5

)

0

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending unrecognized tax benefits

$

17,120

$

15,593

$

14,550

 

 

 

 

 

 

 

 

 

 

 

 

 

We settled a portion of the Internal Revenue Service (“IRS”) audit for tax years 2004 to 2006 in fiscal year 2011. In February 2012, the IRS withdrew its 2011 Revenue Agents Report related to unresolved issues for tax years 2004 to 2006 and reopened the audit phase of the examination. We also settled a portion of the IRS audit for tax years 2007 to 2009 in fiscal year 2016, and a portion of the IRS audit for tax years 2010 to 2013 in fiscal year 2018. In the second quarter of fiscal year 2021, we settled an additional portion of the IRS audits for tax years 2004 to 2013 and made a payment of $1.7 billion, including tax and interest. We remain under audit for tax years 2004 to 2017.

As of June 30, 2023, the primary unresolved issues for the IRS audits relate to transfer pricing, which could have a material impact in our consolidated financial statements when the matters are resolved. We believe our allowances for income tax contingencies are adequate. We have not received a proposed assessment for the unresolved key transfer pricing issues. We do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.

We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years 1996 to 2022, some of which are currently under audit by local tax authorities. The resolution of each of these audits is not expected to be material to our consolidated financial statements.

85


PART II

Item 8

 

NOTE 13 — UNEARNED REVENUE

Unearned revenue by segment was as follows:

(In millions)

 

 

 

 

June 30,

2023

2022

 

 

Productivity and Business Processes

 

$

27,572

$

24,558

Intelligent Cloud

21,563

19,371

More Personal Computing

4,678

 

4,479

 

 

 

 

 

 

 

Total

$

53,813

$

48,408

 

 

 

Changes in unearned revenue were as follows:

(In millions)

 

 

 

 

 

 

Year Ended June 30, 2023

 

 

 

Balance, beginning of period

 

$

48,408

Deferral of revenue

 

123,935

Recognition of unearned revenue

 

(118,530

)

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

53,813

 

 

 

 

 

Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $229 billion as of June 30, 2023, of which $224 billion is related to the commercial portion of revenue. We expect to recognize approximately 45% of this revenue over the next 12 months and the remainder thereafter.

NOTE 14 LEASES

We have operating and finance leases for datacenters, corporate offices, research and development facilities, Microsoft Experience Centers, and certain equipment. Our leases have remaining lease terms of less than 1 year to 18 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year.

The components of lease expense were as follows:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

2023

 

 

2022

 

 

 

2021

 

 

 

 

 

 

 

 

 

Operating lease cost

$

2,875

 

$

2,461

 

$

2,127

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance lease cost:

 

 

 

 

 

 

 

 

Amortization of right-of-use assets

$

1,352

 

$

980

 

$

921

 

Interest on lease liabilities

501

 

 

429

 

 

386

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total finance lease cost

$

1,853

 

$

1,409

 

$

1,307

 

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information related to leases was as follows:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

2023

 

 

2022

 

 

 

2021

 

 

 

 

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

$

2,706

 

 

$

2,368

 

 

$

2,052

 

Operating cash flows from finance leases

 

501

 

 

 

429

 

 

 

386

 

Financing cash flows from finance leases

 

1,056

 

 

 

896

 

 

 

648

 

 

 

 

 

 

 

 

 

 

Right-of-use assets obtained in exchange for lease obligations:

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

3,514

 

 

 

5,268

 

 

 

4,380

 

Finance leases

 

 

3,128

 

 

 

4,234

 

 

 

3,290

 

 

 

 

 

 

 

 

 

 

 

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Supplemental balance sheet information related to leases was as follows:

 

(In millions, except lease term and discount rate)

 

 

 

 

 

 

 

 

 

June 30,

 

2023

 

2022

 

 

 

Operating Leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease right-of-use assets

 

$

14,346

 

 

$

13,148

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities

 

$

2,409

 

 

$

2,228

 

Operating lease liabilities

 

 

12,728

 

 

 

11,489

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating lease liabilities

 

$

15,137

 

 

$

13,717

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance Leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, at cost

 

$

20,538

 

 

$

17,388

 

Accumulated depreciation

 

 

(4,647

)

 

 

(3,285

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

$

15,891

 

 

$

14,103

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities

 

$

1,197

 

 

$

1,060

 

Other long-term liabilities

 

 

15,870

 

 

 

13,842

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total finance lease liabilities

 

$

17,067

 

 

$

14,902

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Remaining Lease Term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

8 years

 

 

 

8 years

 

Finance leases

 

 

11 years

 

 

 

12 years

 

 

 

 

 

 

 

 

 

Weighted Average Discount Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

2.9%

 

 

 

2.1%

 

Finance leases

 

 

3.4%

 

 

 

3.1%

 

 

 

 

 

 

 

 

 

 

The following table outlines maturities of our lease liabilities as of June 30, 2023:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ending June 30,

Operating

Leases

Finance

Leases

 

 

2024

$

2,784

$

1,747

2025

2,508

2,087

2026

 

 

2,142

 

 

 

1,771

 

2027

1,757

1,780

2028

1,582

1,787

Thereafter

6,327

11,462

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total lease payments

 

17,100

20,634

Less imputed interest

(1,963

)

(3,567

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

15,137

 

$

17,067

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2023, we have additional operating and finance leases, primarily for datacenters, that have not yet commenced of $7.7 billion and $34.4 billion, respectively. These operating and finance leases will commence between fiscal year 2024 and fiscal year 2030 with lease terms of 1 year to 18 years.

 

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NOTE 15 — CONTINGENCIES

U.S. Cell Phone Litigation

Microsoft Mobile Oy, a subsidiary of Microsoft, along with other handset manufacturers and network operators, is a defendant in 46 lawsuits, including 45 lawsuits filed in the Superior Court for the District of Columbia by individual plaintiffs who allege that radio emissions from cellular handsets caused their brain tumors and other adverse health effects. We assumed responsibility for these claims in our agreement to acquire Nokia’s Devices and Services business and have been substituted for the Nokia defendants. Nine of these cases were filed in 2002 and are consolidated for certain pre-trial proceedings; the remaining cases are stayed. In a separate 2009 decision, the Court of Appeals for the District of Columbia held that adverse health effect claims arising from the use of cellular handsets that operate within the U.S. Federal Communications Commission radio frequency emission guidelines (“FCC Guidelines”) are pre-empted by federal law. The plaintiffs allege that their handsets either operated outside the FCC Guidelines or were manufactured before the FCC Guidelines went into effect. The lawsuits also allege an industry-wide conspiracy to manipulate the science and testing around emission guidelines.

In 2013, the defendants in the consolidated cases moved to exclude the plaintiffs’ expert evidence of general causation on the basis of flawed scientific methodologies. In 2014, the trial court granted in part and denied in part the defendants’ motion to exclude the plaintiffs’ general causation experts. The defendants filed an interlocutory appeal to the District of Columbia Court of Appeals challenging the standard for evaluating expert scientific evidence. In October 2016, the Court of Appeals issued its decision adopting the standard advocated by the defendants and remanding the cases to the trial court for further proceedings under that standard. The plaintiffs have filed supplemental expert evidence, portions of which were stricken by the court. A hearing on general causation took place in September of 2022. In April of 2023, the court granted defendants’ motion to strike the testimony of plaintiffs’ experts that cell phones cause brain cancer and entered an order excluding all of plaintiffs’ experts from testifying.

Irish Data Protection Commission Matter

In 2018, the Irish Data Protection Commission (“IDPC”) began investigating a complaint against LinkedIn as to whether LinkedIn’s targeted advertising practices violated the recently implemented European Union General Data Protection Regulation (“GDPR”). Microsoft cooperated throughout the period of inquiry. In April 2023, the IDPC provided LinkedIn with a non-public preliminary draft decision alleging GDPR violations and proposing a fine. Microsoft intends to challenge the preliminary draft decision. There is no set timeline for the IDPC to issue a final decision.

Other Contingencies

We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact in our consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.

As of June 30, 2023, we accrued aggregate legal liabilities of $617 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $600 million in aggregate beyond recorded amounts are reasonably possible. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact in our consolidated financial statements for the period in which the effects become reasonably estimable.

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NOTE 16 STOCKHOLDERS’ EQUITY

Shares Outstanding

Shares of common stock outstanding were as follows:

 

(In millions)

 

 

 

 

 

Year Ended June 30,

2023

2022

2021

 

 

 

Balance, beginning of year

7,464

7,519

7,571

Issued

37

40

49

Repurchased

(69

)

(95

)

(101

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of year

7,432

7,464

7,519

 

 

 

 

 

 

 

 

 

Share Repurchases

On September 18, 2019, our Board of Directors approved a share repurchase program authorizing up to $40.0 billion in share repurchases. This share repurchase program commenced in February 2020 and was completed in November 2021.

On September 14, 2021, our Board of Directors approved a share repurchase program authorizing up to $60.0 billion in share repurchases. This share repurchase program commenced in November 2021, following completion of the program approved on September 18, 2019, has no expiration date, and may be terminated at any time. As of June 30, 2023, $22.3 billion remained of this $60.0 billion share repurchase program.

We repurchased the following shares of common stock under the share repurchase programs:

 

(In millions)

Shares

Amount

Shares

Amount

 

Shares

 

Amount

 

 

 

 

 

 

 

 

Year Ended June 30,

2023

2022

2021

 

 

 

 

 

 

 

First Quarter

17

 

$

4,600

21

 

$

6,200

25

 

$

5,270

Second Quarter

20

 

 

4,600

20

 

 

6,233

27

 

 

5,750

Third Quarter

18

 

 

4,600

 

26

 

 

7,800

 

25

 

 

5,750

 

Fourth Quarter

14

4,600

 

28

7,800

 

24

6,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

69

$

18,400

95

$

28,033

101

$

22,970

 

 

 

 

 

 

 

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PART II

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All repurchases were made using cash resources. Shares repurchased during fiscal year 2023 and the fourth and third quarters of fiscal year 2022 were under the share repurchase program approved on September 14, 2021. Shares repurchased during the second quarter of fiscal year 2022 were under the share repurchase programs approved on both September 14, 2021 and September 18, 2019. All other shares repurchased were under the share repurchase program approved on September 18, 2019. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $3.8 billion, $4.7 billion, and $4.4 billion for fiscal years 2023, 2022, and 2021, respectively.

Dividends

Our Board of Directors declared the following dividends:

 

Declaration Date

Record Date

 

 

Payment Date

 

Dividend

Per Share

 

 

Amount

 

 

 

Fiscal Year 2023

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 20, 2022

 

 

November 17, 2022

 

 

 

December 8, 2022

 

 

$

0.68

 

 

$

5,066

 

November 29, 2022

 

 

February 16, 2023

 

 

 

March 9, 2023

 

 

 

0.68

 

 

 

5,059

 

March 14, 2023

 

 

May 18, 2023

 

 

 

June 8, 2023

 

 

 

0.68

 

 

 

5,054

 

June 13, 2023

 

 

August 17, 2023

 

 

 

September 14, 2023

 

 

 

0.68

 

 

 

5,054

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

$

2.72

 

 

$

20,233

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 14, 2021

 

November 18, 2021

December 9, 2021

$

0.62

$

4,652

December 7, 2021

 

 

February 17, 2022

 

 

 

March 10, 2022

 

 

 

0.62

 

 

 

4,645

 

March 14, 2022

 

 

May 19, 2022

 

 

 

June 9, 2022

 

 

 

0.62

 

 

 

4,632

 

June 14, 2022

 

 

August 18, 2022

 

 

 

September 8, 2022

 

 

 

0.62

 

 

 

4,621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

$

2.48

 

 

$

18,550

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The dividend declared on June 13, 2023 was included in other current liabilities as of June 30, 2023.

 

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NOTE 17 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes in accumulated other comprehensive income (loss) by component:

 

(In millions)

 

 

 

 

 

 

Year Ended June 30,

 

2023

2022

2021

 

 

 

Derivatives

 

 

 

 

Balance, beginning of period

 

$

(13

)

 

$

(19

)

$

(38

)

Unrealized gains (losses), net of tax of $9, $(15), and $9

 

34

 

(57

)

34

 

Reclassification adjustments for (gains) losses included in other income (expense), net

 

 

(61

)

 

 

79

 

 

 

(17

)

Tax expense (benefit) included in provision for income taxes

 

 

13

 

 

 

(16

)

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

(48

)

63

 

(15

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change related to derivatives, net of tax of $(4), $1, and $7

 

(14

)

6

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

(27

)

 

$

(13

)

$

(19

)

 

 

 

 

 

 

 

Investments

 

 

 

 

Balance, beginning of period

 

$

(2,138

)

$

3,222

$

5,478

Unrealized losses, net of tax of $(393), $(1,440), and $(589)

 

(1,523

)

(5,405

)

(2,216

)

Reclassification adjustments for (gains) losses included in other income (expense), net

 

 

99

 

 

 

57

 

 

 

(63

)

Tax expense (benefit) included in provision for income taxes

 

 

(20

)

 

 

(12

)

 

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

79

 

45

 

(50

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change related to investments, net of tax of $(373), $(1,428), and $(602)

 

 

(1,444

)

(5,360

)

(2,266

)

Cumulative effect of accounting changes

 

 

0

 

 

 

0

 

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

(3,582

)

$

(2,138

)

$

3,222

 

 

 

 

 

 

 

 

Translation Adjustments and Other

 

 

 

 

Balance, beginning of period

 

$

(2,527

)

$

(1,381

)

$

 (2,254

)

Translation adjustments and other, net of tax of $0, $0, and $(9)

 

 

(207

)

(1,146

)

873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

(2,734

)

$

(2,527

)

$

(1,381

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss), end of period

 

$

(6,343

)

$

(4,678

)

$

1,822

 

 

 

 

 

 

NOTE 18 — EMPLOYEE STOCK AND SAVINGS PLANS

We grant stock-based compensation to employees and directors. Awards that expire or are canceled without delivery of shares generally become available for issuance under the plans. We issue new shares of Microsoft common stock to satisfy vesting of awards granted under our stock plans. We also have an ESPP for all eligible employees.

Stock-based compensation expense and related income tax benefits were as follows:

(In millions)

 

 

 

 

 

Year Ended June 30,

2023

2022

2021

 

 

 

Stock-based compensation expense

$

9,611

$

7,502

$

6,118

Income tax benefits related to stock-based compensation

 

1,651

 

1,293

 

1,065

 

Stock Plans

Stock awards entitle the holder to receive shares of Microsoft common stock as the award vests. Stock awards generally vest over a service period of four years or five years.

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Executive Incentive Plan

Under the Executive Incentive Plan, the Compensation Committee approves stock awards to executive officers and certain senior executives. RSUs generally vest ratably over a service period of four years. PSUs generally vest over a performance period of three years. The number of shares the PSU holder receives is based on the extent to which the corresponding performance goals have been achieved.

Activity for All Stock Plans

The fair value of stock awards was estimated on the date of grant using the following assumptions:

 

 

 

 

 

 

 

Year ended June 30,

 

 

 

 

2023

 

 

 

 

2022

 

 

 

 

2021

 

 

 

 

 

Dividends per share (quarterly amounts)

$

0.62 – 0.68

$

 

0.56 – 0.62

$

0.51 – 0.56

Interest rates

2.0% – 5.4%

0.03% – 3.6%

0.01% – 1.5%

 

 

 

During fiscal year 2023, the following activity occurred under our stock plans:

 

Shares

Weighted Average

Grant-Date Fair

Value

 

 

(In millions)

Stock Awards

 

 

Nonvested balance, beginning of year

 

 

93

 

 

$

227.59

 

Granted (a)

56

 

252.59

Vested

(44

)

 

206.90

Forfeited

(9

)

 

239.93

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonvested balance, end of year

96

$

250.37

 

 

 

 

(a)
Includes 1 million, 1 million, and 2 million of PSUs granted at target and performance adjustments above target levels for fiscal years 2023, 2022, and 2021, respectively.

 

As of June 30, 2023, total unrecognized compensation costs related to stock awards were $18.6 billion. These costs are expected to be recognized over a weighted average period of three years. The weighted average grant-date fair value of stock awards granted was $252.59, $291.22, and $221.13 for fiscal years 2023, 2022, and 2021, respectively. The fair value of stock awards vested was $11.9 billion, $14.1 billion, and $13.4 billion, for fiscal years 2023, 2022, and 2021, respectively. As of June 30, 2023, an aggregate of 164 million shares were authorized for future grant under our stock plans.

Employee Stock Purchase Plan

We have an ESPP for all eligible employees. Shares of our common stock may be purchased by employees at three-month intervals at 90% of the fair market value on the last trading day of each three-month period. Employees may purchase shares having a value not exceeding 15% of their gross compensation during an offering period.

Employees purchased the following shares during the periods presented:

(Shares in millions)

 

 

 

 

 

Year Ended June 30,

2023

2022

2021

 

 

 

Shares purchased

7

7

8

Average price per share

$

245.59

$

259.55

$

207.88

 

 

As of June 30, 2023, 74 million shares of our common stock were reserved for future issuance through the ESPP.

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Savings Plans

We have savings plans in the U.S. that qualify under Section 401(k) of the Internal Revenue Code, and a number of savings plans in international locations. Eligible U.S. employees may contribute a portion of their salary into the savings plans, subject to certain limitations. We match a portion of each dollar a participant contributes into the plans. Employer-funded retirement benefits for all plans were $1.6 billion, $1.4 billion, and $1.2 billion in fiscal years 2023, 2022, and 2021, respectively, and were expensed as contributed.

NOTE 19 — SEGMENT INFORMATION AND GEOGRAPHIC DATA

In its operation of the business, management, including our chief operating decision maker, who is also our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with GAAP. During the periods presented, we reported our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.

We have recast certain prior period amounts to conform to the way we internally manage and monitor our business.

Our reportable segments are described below.

Productivity and Business Processes

Our Productivity and Business Processes segment consists of products and services in our portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment primarily comprises:

Office Commercial (Office 365 subscriptions, the Office 365 portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises), comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, Microsoft Viva, and Microsoft 365 Copilot.
Office Consumer, including Microsoft 365 Consumer subscriptions, Office licensed on-premises, and other Office services.
LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, and Sales Solutions.
Dynamics business solutions, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM (including Customer Insights), Power Apps, and Power Automate; and on-premises ERP and CRM applications.

Intelligent Cloud

Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business and developers. This segment primarily comprises:

Server products and cloud services, including Azure and other cloud services; SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); and Nuance and GitHub.
Enterprise Services, including Enterprise Support Services, Industry Solutions (formerly Microsoft Consulting Services), and Nuance professional services.

More Personal Computing

Our More Personal Computing segment consists of products and services that put customers at the center of the experience with our technology. This segment primarily comprises:

Windows, including Windows OEM licensing and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; and Windows Internet of Things.
Devices, including Surface, HoloLens, and PC accessories.

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Gaming, including Xbox hardware and Xbox content and services, comprising first- and third-party content (including games and in-game content), Xbox Game Pass and other subscriptions, Xbox Cloud Gaming, advertising, third-party disc royalties, and other cloud services.
Search and news advertising, comprising Bing (including Bing Chat), Microsoft News, Microsoft Edge, and third-party affiliates.

Revenue and costs are generally directly attributed to our segments. However, due to the integrated structure of our business, certain revenue recognized and costs incurred by one segment may benefit other segments. Revenue from certain contracts is allocated among the segments based on the relative value of the underlying products and services, which can include allocation based on actual prices charged, prices when sold separately, or estimated costs plus a profit margin. Cost of revenue is allocated in certain cases based on a relative revenue methodology. Operating expenses that are allocated primarily include those relating to marketing of products and services from which multiple segments benefit and are generally allocated based on relative gross margin.

In addition, certain costs are incurred at a corporate level and allocated to our segments. These allocated costs generally include legal, including settlements and fines, information technology, human resources, finance, excise taxes, field selling, shared facilities services, customer service and support, and severance incurred as part of a corporate program. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated and is generally based on relative gross margin or relative headcount.

Segment revenue and operating income were as follows during the periods presented:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

 

2023

 

 

 

2022

 

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

 

$

69,274

 

 

$

63,364

 

 

$

53,915

 

Intelligent Cloud

 

 

87,907

 

 

 

74,965

 

 

 

59,728

 

More Personal Computing

 

 

54,734

 

 

 

59,941

 

 

 

54,445

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

211,915

 

 

$

198,270

 

 

$

168,088

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

$

34,189

 

$

29,690

 

$

24,351

 

Intelligent Cloud

 

37,884

33,203

 

26,471

More Personal Computing

 

16,450

 

 

20,490

 

 

19,094

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

88,523

 

$

83,383

 

$

69,916

 

 

 

 

 

No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for fiscal years 2023, 2022, or 2021. Revenue, classified by the major geographic areas in which our customers were located, was as follows:

 

(In millions)

 

 

 

 

 

Year Ended June 30,

2023

2022

2021

 

 

 

United States (a)

$

106,744

$

100,218

$

83,953

Other countries

105,171

98,052

84,135

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

211,915

$

198,270

$

168,088

 

 

 

 

(a)
Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue.

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PART II

Item 8

 

Revenue, classified by significant product and service offerings, was as follows:

 

(In millions)

 

 

 

 

 

Year Ended June 30,

2023

2022

2021

 

 

 

Server products and cloud services

 

$

79,970

$

67,350

$

52,589

Office products and cloud services

48,728

 

44,862

39,872

Windows

21,507

24,732

22,488

Gaming

15,466

 

16,230

 

15,370

LinkedIn

 

15,145

 

 

13,816

 

10,289

Search and news advertising

12,208

 

11,591

 

9,267

Enterprise Services

 

 

7,722

 

 

 

7,407

 

 

 

6,943

 

Devices

 

 

5,521

 

 

 

7,306

 

 

 

7,143

 

Dynamics

5,437

4,687

3,754

Other

 

 

211

 

 

 

289

 

 

 

373

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

211,915

$

198,270

$

168,088

 

 

 

 

 

 

 

 

 

 

 

 

 

Our Microsoft Cloud revenue, which includes Azure and other cloud services, Office 365 Commercial, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties, was $111.6 billion, $91.4 billion, and $69.1 billion in fiscal years 2023, 2022, and 2021, respectively. These amounts are primarily included in Server products and cloud services, Office products and cloud services, LinkedIn, and Dynamics in the table above.

Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment. It is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.

Long-lived assets, excluding financial instruments and tax assets, classified by the location of the controlling statutory company and with countries over 10% of the total shown separately, were as follows:

 

(In millions)

 

 

 

 

 

June 30,

2023

2022

2021

 

 

 

United States

$

114,380

$

106,430

$

76,153

Ireland

16,359

15,505

13,303

Other countries

56,500

44,433

38,858

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

187,239

$

166,368

$

128,314

 

 

 

 

95


PART II

Item 8

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Microsoft Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2023 and 2022, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity, for each of the three years in the period ended June 30, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2023, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 27, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition – Refer to Note 1 to the financial statements

Critical Audit Matter Description

The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company offers customers the ability to acquire multiple licenses of software products and services, including cloud-based services, in its customer agreements through its volume licensing programs.

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PART II

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Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:

Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as software licenses and related services that are sold with cloud-based services.
The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation.
Identification and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g., variable consideration, optional purchases, and free services).
Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately.

Given these factors and due to the volume of transactions, the related audit effort in evaluating management's judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment.

How the Critical Audit Matter Was Addressed in the Audit

Our principal audit procedures related to the Company's revenue recognition for these customer agreements included the following:

We tested the effectiveness of controls related to the identification of distinct performance obligations, the determination of the timing of revenue recognition, and the estimation of variable consideration.

 

 

We evaluated management's significant accounting policies related to these customer agreements for reasonableness.

 

 

We selected a sample of customer agreements and performed the following procedures:

 

 

-

Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement.

 

 

-

Tested management's identification and treatment of contract terms.

 

 

-

Assessed the terms in the customer agreement and evaluated the appropriateness of management's application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions.

 

 

We evaluated the reasonableness of management's estimate of stand-alone selling prices for products and services that are not sold separately.

 

 

We tested the mathematical accuracy of management's calculations of revenue and the associated timing of revenue recognized in the financial statements.

Income Taxes – Uncertain Tax Positions – Refer to Note 12 to the financial statements

Critical Audit Matter Description

The Company's long-term income taxes liability includes uncertain tax positions related to transfer pricing issues that remain unresolved with the Internal Revenue Service ("IRS"). The Company remains under IRS audit, or subject to IRS audit, for tax years subsequent to 2003. While the Company has settled a portion of the IRS audits, resolution of the remaining matters could have a material impact on the Company's financial statements.

Conclusions on recognizing and measuring uncertain tax positions involve significant estimates and management judgment and include complex considerations of the Internal Revenue Code, related regulations, tax case laws, and prior-year audit settlements. Given the complexity and the subjective nature of the transfer pricing issues that remain unresolved with the IRS, evaluating management's estimates relating to their determination of uncertain tax positions required extensive audit effort and a high degree of auditor judgment, including involvement of our tax specialists.

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PART II

Item 8

 

How the Critical Audit Matter Was Addressed in the Audit

Our principal audit procedures to evaluate management's estimates of uncertain tax positions related to unresolved transfer pricing issues included the following:

We evaluated the appropriateness and consistency of management's methods and assumptions used in the identification, recognition, measurement, and disclosure of uncertain tax positions, which included testing the effectiveness of the related internal controls.
We read and evaluated management's documentation, including relevant accounting policies and information obtained by management from outside tax specialists, that detailed the basis of the uncertain tax positions.
We tested the reasonableness of management's judgments regarding the future resolution of the uncertain tax positions, including an evaluation of the technical merits of the uncertain tax positions.
For those uncertain tax positions that had not been effectively settled, we evaluated whether management had appropriately considered new information that could significantly change the recognition, measurement or disclosure of the uncertain tax positions.
We evaluated the reasonableness of management's estimates by considering how tax law, including statutes, regulations and case law, impacted management's judgments.

 

/s/ DELOITTE & TOUCHE LLP

 

Seattle, Washington

July 27, 2023

 

We have served as the Company's auditor since 1983.

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PART II

Item 9, 9A